Notices from BOEM to Gulf of Mexico operators will hit mail boxes starting in November: an Oil & Gas 360® Exclusive Interview with BOEM GOM Regional Director Michael Celata – Part 3 of a Series

New, much more stringent financial demands for decommissioning liability are about to hit the offshore oil and gas operators and leaseholders hard. Oil and gas companies holding federal leases on the U.S. outer continental shelf (OCS) will face significant pain as “NTL 2016-N01 – Requiring Additional Security” sinks its teeth into them. The busiest region for oil and gas operations on the U.S. OCS is the Gulf of Mexico.

How OCS operations are overseen by the federal government

It’s about how the government manages the seafloor and its minerals out to 200 miles offshore. Beyond the different states’ roughly three to nine mile limits, federal agencies manage the oil and gas platforms, wells, pipelines and infrastructure that produce and deliver oil and gas from reservoirs from the nation’s acreage on the outer continental shelf.

The operators pay the U.S. government a significant royalty for producing the oil and gas from federal OCS leases. For the production stage, DOI has set a royalty rate of 12.5 percent for offshore parcels near Alaska and recently increased the royalty rate to 18.75 percent for newly leased parcels in the Gulf of Mexico.

According to a Congressional Budget Office April 2016 report entitled “Options for Increasing Federal Income from Crude Oil and Natural Gas on Federal Lands”:

“All told, the gross income (before payments to states) from onshore oil and gas resources averaged $3.0 billion annually from 2005 to 2014, comprising the following amounts:

  • About $230 million per year in bonus bids
  • $50 million per year in fees for nonproducing leases, and
  • $2.7 billion per year in royalties from production.

Total gross income from offshore oil and gas resources averaged $8.0 billion per year over the 2005–2014 period:

  • Lease auctions generated about $1.8 billion
  • Rental fees generated about $230 million, and
  • Royalties from production yielded about $6.0 billion.”
Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

Gulf of Mexico: Drilling platforms on the U.S. outer continental shelf

What is changing on the OCS?

Decades-old bonding and decommissioning liability requirement of the former Minerals Management Service (MMS) are now history. New rules went into effect on Sept. 12, 2016, through a notice from the BOEM called “NTL No. 2016-N01: Requiring Additional Security” which went into official effect on Sept. 12, 2016.

Who are the government’s players?

The OCS is handled by three agencies that were created by the Department of Interior in the aftermath of the Deepwater Horizon disaster.

The Bureau of Ocean Energy Management—BOEM—and the Bureau of Safety and Environmental Enforcement—BSEE—are the two agencies that are charged with setting the rules and managing operations on the OCS. A third agency—the Office of Natural Resources Revenue—ONRR—manages the mineral royalties coming to the Treasury.

When it comes to the OCS, BOEM runs the store. It’s the CEO. BSEE manages the oil and gas operations side. It’s the COO. ONRR manages the accounting functions. It’s the CFO for the OCS.

These three agencies have replaced one agency that was carved up after the Deepwater Horizon disaster—the Minerals Management Service, or MMS. For decades the GOM and other offshore operators have run their businesses and operations by the rules of the MMS—the MMS representing both the royalty owner (the U.S. Treasury) and the caretaker and rule enforcer for the OCS (MMS). But after Deepwater Horizon, the government split the OCS oversight duties into three separate agencies.

$30 billion to $40 billion OCS decommissioning tab in the Gulf of Mexico

Here is the way BSEE puts it: “From the first signature on a lease, offshore operators know that they will have to clean up the area after they drill and produce hydrocarbons (oil and natural gas) and decommission the facilities and structures placed on the leased area, also called Plug and Abandonment (P & A).

“The most common way to reclaim a site includes removing the superstructure and often selling it as scrap metal. Other situations may require that the structure be dismantled and removed, such as damage incurred from a storm, use of different equipment on the original structure or another company using the well. Any operation that is decommissioned and is no longer “economically viable,” infrastructure that is severely damaged or idle infrastructure on active leases, are considered “idle iron” according to NTL 10-5 .”

BSEE’s website estimates that there are approximately 3,000 active oil and gas production platforms existing on the U.S. outer continental shelf (OCS). More than 40% of these facilities are more than 25 years old, the agency says, and once the wells that were drilled are depleted, the leaseholders and operators must begin the process of ending offshore oil and gas operations at an offshore platform and returning the ocean and seafloor to its pre-lease condition.

Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

Deconstructing a platform. Photo: BSEE

Over the past decade, the offshore energy industry has averaged 130 platform removals per year, according to BSEE. So keeping that pace, that’s about a quarter century’s worth of time to decommission the balance of those platforms when their production declines to the point of plugging and abandoning the wells, shutting down projects and removing the “idle iron.”

The actual amount of cash needed to decommission all those existing platforms is huge. Consequently the amount of collateral required of operators will be huge.

BOEM and BSEE estimate the OCS is home to between $30 billion and $40 billion worth of decommissioning liability, and they have a strong mandate from above not to let the taxpayers be left holding the bag for decommissioning.

In an extended commodities price downturn such as today’s, when the financial strength of many oil and gas operators has already been sapped by dropping cash flow due to low oil prices, lower credit ratings, evaporating credit facilities, shrinking reserves calculations at today’s commodities prices, and balance sheets constrained by high debt loads, the last thing the companies operating on the OCS need is a new, heavy-handed financial punch in the face.

But a lot of industry experts believe that is exactly what is coming.

New requirements put the liability on all parties in a lease

As of Sept. 12, 2016, BOEM’s new requirements say every party in a lease is liable for the costs to decommission the projects they participate in on the OCS. And the lessee and operators have to prove they’re good for it now and in the future.

Waivers are gone. Now, all parties involved in a lease are liable for P&A and decom costs and they are now required to provide cash, bonding, other approved collateral or a “tailored financial plan” to cover the projected decommissioning costs for every facility on all of the OCS leases in which they are partners or co-owners.

Get out your checkbook

In the coming months operating companies and holders of OCS leases will have to come up with cash, supplemental bonding, letters of credit, bank guarantees or other forms of collateral representing the entire cost of plugging and abandoning and decommissioning all of their oil and gas projects on the OCS. The amount they will be asked for will be based on BSEE’s recently updated cost survey of operators that brings the estimated liability from 1990s pricing up to 2016 pricing levels.

BOEM demand letters trigger a 60-day compliance clock

BOEM is in the process now of reviewing each company’s lease holdings on the OCS using the updated decom costs calculated by BSEE to determine in which leases they have liability and the financial liability for every lease they have.

BOEM’s regional directors will make a determination as to how much additional security/collateral is required of the OCS operators and leaseholders in their regions.

The regional director will notify lessees and operators of the amount of liability they have to cover and companies have 30 days to respond/dispute, including requesting a meeting with BOEM.

This financial review process will be ongoing: “Periodic reviews to evaluate your financial ability to carry out your present and future obligations and to determine appropriate levels of required additional security may be done at any time at the discretion of the regional director…,” NTL 2016-N01 says.

Sole liability properties:  you have 60 days to provide financial assurance

If you are sole owner and operator of an OCS lease, you have no wiggle room. “After you receive an order to provide additional security, with or without a preceding proposal and meeting, you must provide the additional security required for your sole liability properties within 60 days of receipt of the order,” according to NTL 2016-N01.

A lifeline for co-owners/co-lessees in an OCS lease: “tailored plans”

There is a lifeline for people who are partnering with others on OCS leases.

Under the old rules, smaller partners in a lease were granted a waiver from providing additional bonding if one partner’s financial standing was sufficient to cover the decom liability requirement (e.g., major, supermajor, superindependent) for the lease. Waivers no longer exist.

Under the new NTL, additional security requirement from BOEM that are now in effect, everyone participating in a lease is solely and severally liable for 100% of the decom liability, and it’s up to the group to work out who pays what. The government doesn’t care as long as 100% of the liability is covered for the lease.

The lifeline is that the group can formulate a “tailored plan” of compliance with the financial assurance requirements from NTL 2016-N01.  Operators have ten days to notify BOEM that they intend to submit a tailored plan, and you have up to 120 days to submit the tailored plan for the regional director’s approval.

BOEM has volunteered to “provide guidance in formulating and developing your tailored plan,” if assistance is requested by joint lessees and operators.

BOEM says operators may propose and BOEM may approve the following phased-in timetable for compliance with the additional security requirements:

  • Provide 1/3 within 120 calendar days from date of the tailored plan’s approval;
  • Provide 2/3 within 240 calendar days;
  • Provide the full amount of remaining required additional security within 360 calendar days.

“You may request that the regional director allow you to vary the above phasing-in schedule,” the NTL says. So there is some degree of wiggle room as to schedules that joint operators will be allowed in order to provide the required security to the government.

On the topic of dividing the joint financial liability for co-owned leases, BOEM published these as part of a much longer list of questions and answers from its Houston meeting about the new NTL:

Q: How will “ownership interest” be computed? Will it be proportionate to actual interest and what will it apply to, Record Title, Operating Rights, or both?

BOEM:  BOEM will not compute ownership interests. Record title owners will need to negotiate with their co-record title owners and operating rights owners to determine which portion of the additional security coverage each company will post, adding to 100 percent coverage. Based on 30 CFR 556.605, an operating rights owner is only liable for obligations arising from that portion of the lease to which its operating rights appertain and that accrue during the period in which the operating rights owners owned the operating rights.

Q: What are the ramifications to an operator who is unable to successfully “coordinate” the posting of security from/with a co-owner?

BOEM:  Each lessee is jointly and severally liable. BOEM is interested in 100 percent coverage, and it is up to the lessees to negotiate with one another and decide what portion of that liability will be posted by each lessee. However, if 100 percent coverage is not received by BOEM, the regional director may assess penalties under 30 CFR 550, subpart N, request BSEE to suspend production or other operations in accordance with 20 CFR 250.173, or initiate action to cancel the lease pursuant to 30 CFR 556. 1102.

Q:  BOEM will no longer waive bonds automatically based on the combined financial strength and reliability of co-lessees and operating rights holders. How will this work from a BOEM perspective and from a lessee perspective?

BOEM:  One or more qualifying lessees can provide their self-insurance for all or part of the liability on that lease. Any percentage of the total per-lease liability not covered by the self-insurance of a qualifying lessee can be provided in other types of financial instruments. The combination of all these forms of financial assurance must equal 100 percent of the liability on the lease.

Who are the companies that are involved in OCS leases in the Gulf of Mexico?

If you look at the operators listed in BOEM’s 200-page directory of leases and leaseholders—the Gulf of Mexico Region Operators Directory–it’s like reading from the pages of an oil and gas history book: Anadarko, Apache, BHP, BP, Chevron, ConocoPhillips, Devon, Energy XXI, ExxonMobil, Forest Oil, Hess, Hunt, McMoRan, Murphy, Newfield, Noble, Pioneer, Shell, Texaco, Union Oil, W&T, XTO, Zapata. That’s just a small sample from the first five pages.

Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

Typical page from BOEM’s GOM Operators Directory – showing lease blocks, operators and production

BOEM’s Gulf of Mexico Regional Director Mike Celata says there are about 600 companies on the Gulf of Mexico OCS and he told Oil & Gas 360® that he highly recommends that operators get in touch with the agency now, and that they start to work on the tailored plans with BOEM as soon as possible.

Celata said once the process gets to the demand letter stage, it’s too late for further meetings or putting together tailored plans because the 60-day timeline to comply is triggered at that point.

“The 60 days is one of the things that the regional director does not have discretion in changing, so they really need to come in and talk to us as soon as possible,” Celata told Oil & Gas 360® in an exclusive interview about NTL 2016-N01.

In the interview Celata talked about how BOEM’s new financial demands will be implemented, how they will affect companies operating in the Gulf, and how he believes the new security requirements will affect the offshore drilling industry as a whole.

Oil & Gas 360® Interview with BOEM Gulf of Mexico Regional Director Mike Celata

Oil and Gas 360®:  In your view as BOEM’s director for the Gulf of Mexico OCS region, how will the new supplemental bonding/collateral requirements required by NTL 2016-N01 impact the independent oil and gas companies operating in your region?

Michael Celata:  I don’t think there’s one blanket answer for all the independents. Each company has a different financial position, different cash flows. I think one of the main points with the NTL is we want to work with each company individually and we’re looking to provide a mutually beneficial solution that can meet both our needs and the operator’s needs wherever possible.

OAG360: That sounds pretty flexible compared to how the actual rule reads. Is there a lot of flexibility available to you? Is that how you look at it?

MC:  If you go into the actual regulation, there is regional director discretion allowed in the regulation. There is some structure upfront to the NTL, especially around sole liabilities, so that’s the first thing that has to be provided for, but we would like the [joint] owners/operators to come in and look at a financial plan, a tailored plan approach. Under the tailored plan approach we have about a year to work out a solution for both BOEM and the operator.

OAG360: How will the new NTL affect the oilfield service companies in the Gulf?

Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

BOEM Gulf of Mexico Regional Director Michael Celata

MC:  It doesn’t have any direct impact. The NTL only applies to operators, record title holders, operating rights ROW and RUE holders.

OAG360:  What is the total number of rights holders and record title holders in the GOM who are subject to the new supplemental bonding requirements? 

MC:  There are actually over 600 individual qualified companies operating in BOEM that have some sort of financial liability. So ultimately it would impact all those companies. I think there are only about 66 companies at this point in time who’ve supplied us their accredited financials, so we’re reviewing those—their audited financials to see if they get the 10% self-insurance. That would be for the self-insurance, the 10%.

OAG360:  How will the agency proceed to begin enforcement of the new supplemental security rules? How do you see the steps starting forward from now?

MC:  Our goal is to work with operators, right, so we don’t want to need to use any enforcement procedures. We’ve been encouraging operators for a long time to come in and talk to us to better understand what the process is moving forward.

I think in November is when we send out the actual orders to the operators, and I think at that point it’s going to become a more formal process for a period of time. The companies have 60 days after that order to cover their sole liabilities, and then 120 days to cover their non-sole liabilities.

But, again, they also have that option—after the sole liabilities are covered—to come in and say they want to provide a tailored plan, and that gives us more flexibility to go beyond the 120 days [for jointly owned or operated properties].

OAG360:  How much time flexibility is there—if they are going to provide a tailored plan, how does that work, the timing on that?

MC:  We’ve actually talked to some companies already, pre-NTL, in terms of some companies that have recently had some financial issues and under the previous NTL had lost what at the time we termed the waiver. It really is dependent on the company and the situation. We negotiated with one company for a year before we signed an agreement. We’ve also taken less time—it depends on what kind of solutions companies want to provide, whether they just want to provide bonding or whether they want to work through some unique option that we really haven’t done in the past.

OAG360:  So that’s what you were getting at earlier, it’s sort of up to each company to work things out?

MC:  If a company has self-insurance at the 10% and that covers all of their properties, that’s fairly straight forward and they won’t need to go beyond that. Some companies like to just provide bonds to cover their liabilities if their liabilities aren’t that substantial, and then in other cases it’s more complex.

OAG360:  What’s the agency’s timeline to review operating company and leaseholder financials, to make determinations of the need for supplemental security, assign the amounts and send notices?

MC:  The audited financials—we’ve received those from about 66 companies and we’re in the process of trying to finalize their decision, so hopefully for those companies that decision will go out shortly.

Companies still can come in and decide to provide us their audited financials at a later date and we’ll make a decision at the appropriate time. But we had asked them to provide it up front because it helps us determine and be able to tell them what self-insurance they’ll have.

Part of the process is to whittle down those properties that need to actually have financial assurance. So if you have self-assurance and you tell us what properties you want to apply those to, then that limits the amount of properties that you have to deal with in the next step.

We tried to put a process together that narrowed the focus down  as we went, one that made the number of properties smaller and smaller as we went through the process.

OAG360:  After the notices go out, what do you expect? Do you expect a barrage of questions from those 600 companies you referenced earlier, other than the 66 companies that have already acted?

MC:  I think we’ll continue down the same path that we have. We get companies to come in and talk to us here in our office in the New Orleans area; we’ve also had companies reach out to our analysts. We have one person in Houston—we’re trying to answer all their questions.  The companies have ranged from smaller to majors, and they’re all just trying to better understand the NTL and how it’s going to impact them.

But I think we’ve been pretty consistent in our message for a while now—we’ve done some outreach for at least a couple of years over this. And then we met early last year. I gave a couple of talks, one here in New Orleans back in February at the Plano meeting.

Hopefully operators have that message now and they are working to make sure that their property list matches ours, so we can get that out of the way and then we can work through the process of sole liabilities and then a tailored plan process.

 Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

OAG360:  Looking at your slide presentation entitled Regulatory Considerations for Ensuring Decommissioning & Other Lease Obligations, Slide 11 – second page slide entitled: “30 CFR 556.53 Additional bonds.” It says: “The regional director will consider potential underpayment of royalty and cumulative obligations to abandon wells, remove platforms and facilities and clear the seafloor of obstructions in the regional director’s case-specific analysis.”

OAG360:  Can you explain the reference to potential underpayment of royalty? 

MC:  Additional bonding covers more than just decommissioning. Decommissioning is the largest liability—somewhere between as we’ve estimated $30 billion and $40 billion of outstanding liability.

But those additional bonds, actually, we can request those for any future lease obligations—so that can incur well plugging and abandonment, structure removal, site clearance, rents and royalties. So royalty payments are received by our Office of Natural Resource Revenue, ONRR. They can request at any time, if they’re not getting the appropriate royalty payments, that BOEM issue a demand for additional financial assurance. This request for additional financial assurance can be for more than just decommissioning, it can cover other outstanding liabilities of operators.

OAG360:  So is ‘case specific’ analysis when somebody is not paying royalties?

MC:  Yes, absolutely.

OAG360:  Is that something that is common? Is it something that has happened a lot in the past?

MC:  I’m not sure it’s common. It’s happened before, it’s happening now.  There’s been about 15 bankruptcies since 2009, where companies who have been qualified to operate in the Gulf of Mexico may have gone into bankruptcy voluntarily or been forced into bankruptcy of some kind. One of the most recent ones—Black Elk—I think there was an outstanding question of underpayment of royalties in that scenario. It does happen occasionally, at least.

OAG360:  On that topic, if a company goes into bankruptcy and let’s say they’re part of a group that doesn’t include a supermajor, how are you going to collect money if people are in bankruptcy?

MC:  The goal of the program is to make sure we have the appropriate financial assurance in place before the company goes into bankruptcy, right? That’s why we put a whole risk management program together. I think we have about 16 people in the Gulf of Mexico operations group plus we have a policy group in headquarters whose role is now to monitor companies’ financial strength on a more routine basis. We are working to get resolution for some of these issues before companies go into bankruptcy.

OAG360:  Are there any changes in the works for the stage 1- general lease surety bond requirements of before we get to the supplemental bonding stage?  Is that something that is being looked at?

We don’t have any immediate plans to adjust those values. I think that BOEM recognizes that some of those values are somewhat low. I think the maximum is a $3 million area-wide bond when you get to the development stage. But at this point in time we’ve been concentrating on this additional financial assurance program.

OAG360:  Your slide entitled “Sufficiency of Supplemental Bonds” says,  “BSEE is now in the process of reviewing and updating its decommissioning cost assumptions and BOEM is in the process of using those updated cost assessments for supplemental bond demands on a case by case basis.” What is your estimated timeline for the BOEM to receive the BSEE-determined decommissioning liability for each operator/lessee?

MC:  BSEE has actually updated their assessments as of Aug. 29th, or the last week of August. We’re using those updated costs in our assessments now. Companies can get those online at

OAG360:  By what general percentage do you see the decom/P&A liabilities increasing based on the updated estimates from BSEE?

MC:  I haven’t looked at it in that much detail, but I think overall costs may have gone up. But one of the other things we did with the assessments that you wouldn’t know by just looking at our NTL, is that in the past when we did an assessment for decommissioning costs, we did it at the plan stage – the exploration plan stage or the development plan stage – so those assessments would include wells that a company may never drill.

So what we’ve done is move that assessment to the Application for Permit to Drill—the APD stage. So that as we move forward and also in the current assessments—those paper wells have been removed—and then all future additional assessments will only be at the time the well is going to be drilled.

OAG360:  One of your slides said, “However it is BOEM and BSEE’s intention to fully implement the higher cost assessments and related supplemental bond determinations (across the board) as soon as reasonable.”  Now that they are updated is it just up to the operator to go on the website and get the new assessments?

MC:  And then in November we’ll be sending out those order letters which will have the numbers in them, but I do recommend that the operators go out and look at their property list now because they can get that assessment now.

OAG360:  Mike, the stated goal is to protect the taxpayer from risk on the uncollateralized decommissioning liability on the OCS oil and gas production.  Before the new NTL went into effect, how much decom liability has been paid with taxpayer money in the past few decades?

MC:  I don’t have a good estimate for you. I do know that back in 1989 the Alliance bankruptcy was probably the first case in recent times where MMS had to use royalty payments to cover the cost of decommissioning, but I don’t know the exact figure.

Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

We still have a lot of ongoing bankruptcies. ATP is one of those cases where it’s not a finished, completed bankruptcy. At the time the estimates for decommissioning and the amount of funds we got in the decommissioning trust, the decommissioning trust was insufficient to cover that cost. Many of these cases are still ongoing, so we’ll have to wait and see whether there are any additional costs for the federal government.

OAG360:  What do you think will happen to the offshore drilling industry once the notices are out and the higher obligations and supplemental bonding are at the enforcement stage, what’s your view as to how this is going to affect the industry?

MC:  I’m hoping that industry comes in and talks to us. If there are some potential problems they can identify those early on so that we can work with them. The goal of the program is to get financial assurance in place, not to send companies into bankruptcy. There’s not a lot of benefit to us if a company goes into bankruptcy and their obligations aren’t covered. It’s not in our best interest to have companies go into bankruptcy.

I really think the whole point of these tailored plans [is to generate] solutions that might meet people’s needs. We don’t require bonding of everything, we can look at other options like decommissioning trusts which we’ve had under the regulations for many years—the full cost of decommissioning can be funded over a number of years.

One of the things that we look at under those trust agreements would be some sort of a production profile and a decline curve estimate and then say that we want full funding five or ten years before the expected production ceases.

We’ve asked companies to look for new and unique ways to cover financial assurance. One of the things we’ve heard about from industry, though we’ve never had anybody come in and put a specific proposal in front of us, is about a pool of funds out there where all the operators could pay into this pool of funds and it would cover all of maybe the sole liabilities out there. So if a company went bankrupt, then that pool would be used, so that would probably put less financial obligation on each individual company, but it potentially could meet BOEM’s needs.

I still think we have a long way to go to figure out solutions for everybody, but that’s what we’re trying to achieve with this program.

Anything I can do to help get everybody to come in and talk to us and find resolutions to meet everybody’s needs, I think that would be helpful.

Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

OAG360:  Slide No. 25 entitled “BOEM’s Financial Assurance Goals” – it lists “Protect the U.S. from financial loss or environmental damage when a leaseholder or operator is unable to pay rents and royalties or perform a required decommissioning.”  Could you give some examples of occasions when an operator or leaseholder has been unable to pay rents and royalties and what action was taken.

MC:  I know in the Black Elk bankruptcy there were definitely some outstanding royalty payments that most likely won’t be covered when the bankruptcy is completed.

OAG360:  If a company with federal OCS leases in the Gulf falls below the financial capacity, projected strength, business stability or reliability thresholds – if something financial triggers significantly higher collateral demand under NTL 2016-N01 and they are unable to meet the collateral demand, what happens in the case of a lessee or operator of a sole liability property, if they aren’t able to provide the security in 60 days?

MC:  The NTL outlines potential penalties including suspension of production and other operations, but again those aren’t necessarily in the mutual benefit of both BOEM and the operator. So, if they suspect they’re not going to meet those obligations they should come in and talk to us as soon as possible, so we can try to work something out.

One thing I can say about the NTL and the sole liabilities, is this: that’s one of the things—the time frame, the 60 days—that the regional director does not have discretion in changing, so they really need to come in and talk to us as soon as possible.

OAG360:  What about for a property with divided ownership, one that is other than sole liability?

MC:  For the divided ownership, we’re going to look to the operator to come up with a resolution on that. I know that there’s a lot of bonding out there in industry between predecessors already, so those are some of the things we’d like to give some sort of credit for, but we’ve never been party to those agreements in the past. And some of the operators have come in and talked to us about that, even some of the majors, in discussing how they’re going to share the risk. But ultimately we’re going to hold the operator responsible to try to bring together all the parties to find a solution.

OAG360:  Mike, what is the industry going to look like if in a few years if a significant portion of the small to medium sized operators are out of the picture, if because of the more strict financial requirements they’re not incented to go out and work in the Gulf. As a historic practice the majors usually take the leases at the beginning and work them however they want to, and after that they sell them in the aftermarket to the smaller operators. If a lot of these smaller operators are out of the picture, how is the overall business going to look out there?

MC:  I really kind of disagree with the premise, right? I don’t think that small and medium-sized companies will be out of the picture moving forward.

I hundred percent agree with you that’s the way the Gulf has progressed over the years, that the majors have sold leases to smaller companies and the majors move out to deeper water. And the smaller companies can produce at a lower cost and continue with that production, which benefits not only the companies but the U.S. resource base and BOEM and the American taxpayer for getting royalties.

Gulf of Mexico Operators: Prepare to Present the U.S. Government with Financial Assurance Covering 100% of Decommissioning Liability for your OCS Leases

There are currently still small companies out there who are entering the Gulf today, as we speak. I think one of the companies is Cox. Even though there are lower oil prices now, there are still companies entering the Gulf buying properties from the majors, and I expect that to fully continue. It may not be the same companies that are out there today, but I think there are always opportunities in the Gulf for these smaller companies to continue producing and get some return on their investment.

OAG360:  At the end of NTL 2016-N01, “Reservation of Rights,” it says: BOEM reserves the right to modify the procedures and/or criteria in this NTL on a case-by-case basis, as necessary…”  Can you explain, give examples, of how modifying the procedures/criteria might apply on a case-by-case basis?

MC:  I think this goes to some of the discussions in a tailored plan. Number one, one of the things we’ve done in the past before BSEE updated their costs was that we would defer financial obligations if there was a disagreement between the operator and BSEE’s assessment. We’d ask for the financial assurance—the dollar amount they agreed on while they resolved the problem with BSEE.

One of the other things that operators have come in and talked to us about is they want some credit for the decommissioning contracts. So that they don’t necessarily have to provide some financial assurance if they have a contract in place and they plan to decommission these properties over a year. So we’d like to get some credit for that. I think that potentially reduces some of the risk for the government.

One of the things we haven’t done yet—we’re asking for the contract, we asking for assurances—what metrics are in those contracts that we know you’re going to meet those obligations.  And if they didn’t meet the obligations, what would that mean in terms of our tailored plan.

We’re going to look at this in a year. And see what the impacts are, what are the lessons learned, and I think that’s one of the reservations or rights is that we may update the procedures after a year as we all get more experience moving forward this NTL.

I was just at an international upstream regulatory forum for other countries, and I know the UK is also looking at financial assurance around decommissioning, so we agreed that we would go back there in a year and talk about our lessons learned.

OAG360:  Is NTL 2016-N01 subject to Executive Order 12866–the review by the Office of Management and Budget or the Office of Information and Regulatory Affairs?

MC:  The NTL doesn’t change the regulations at all. The regulations themselves have not changed. The regulations say that the financial assurance has to be based on five criteria, right? And those five criteria are not defined exactly how the regional director will look at that.

This NTL is just giving some clarification of how we’re now looking at those five criteria: the financial capacity, projected strength, business stability, reliability and the record of compliance.

The NTL is a clarification in plain English, a notice for the lessees as to how BOEM is going to implement those regulations.

Regardless of whether a company is a large operator or small fractional participant in an OCS lease, the U.S. offshore drilling industry is likely to morph into vastly different animal in the next few years. One industry professional told Oil & Gas 360®, “The Gulf is filled with dead men walking.”

Read Part 1 of this series of feature stories on NTL 2016-N01 and the Gulf of Mexico here.

Read Part 2 of this series on NTL 2016-N01 here.



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